Q3 2020 Trane Technologies PLC Earnings Call
North America.
[music] good morning, and welcome to the train technologies Q3, 2020 earnings Conference call.
My name is Mariama and I will be your operator for the call.
The call will begin in a few moments with the speaker remarks in the Q and a session at.
At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
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I will now turn the call over to Zac Nagle, Vice President of Investor Relations.
Thanks, operator.
Good morning, and thank you for joining us for trees technologies third quarter 2020 earnings conference call.
This call is being webcast on our website, a treat technologies dot com, where you'll find the company presentation.
We're also recording and archiving this call on our website.
Please go to slide two.
Statements made in today's call that are not historically capex are considered forward looking statements and are made pursuant to the safe Harbor provisions of Federal Securities Law.
Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results.
This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release.
Joining me on today's call are Michael Mark Chairman, and CEO, Dave ordinary President and COO.
And Chris Q, Senior Vice President and CFO with that please go to slide three and I'll turn the call over to Mike Mike.
Thanks, Zack thanks, everyone for joining us on today's call.
Before we move into the details of our third quarter results I'd like the momentarily stepped back and provide broader perspective on the unprecedented level of change we're seeing around the world both in business and in our daily lives. So why this is particularly relevant powertrain technologies.
At present, we appear to be seeing acceleration of COVID-19 cases in most parts of the world, particularly in the northern hemisphere.
As the weather turns colder and more activities and time spent in doors.
We're at a very critical phase in the course of this pandemic and we can't let our guard down.
Proper hygiene, Cisco, saying, an awareness of masks will all remain critical defensive actions in order to contain and eventually eliminate the spread of the virus.
Overall, our best estimate is that there was 1.7 trillion square feet of residential and nonresidential building space in the world.
Over 400 billion square feet of this represents non residential communal space.
Importantly in developed economies as people spend on average of 90% of the day and doors, which reinforces the need for healthy indoor environments.
Building owners tenants and every occupant of an indoor space.
Certainly looking at the overall health of the fiscal environment with a new sense of responsibility and concern and there is no doubt all will be contemplating and taken some action to renew or bring indoor spaces to better overall air quality standards.
Systemic holistic actions to assess and improve the health and safety of indoor environments is Paramount right now.
Requires an industry wide response for support.
Over the past quarter, we formed our center for healthy and efficient spaces modeled after the center for energy efficiency sustainability that we formed over a decade ago.
Convene internal and external experts to collaborate and deliver innovation thought leadership market education, and communication and enhance the policies and standards are required to meet the present and future challenges we're all facing.
Okay, Shacey systems already drive, 40% or more of a buildings total electricity demand.
However, we know that many indoor air quality strategies and enhancements can have a negative impact of further increasing building electrical demand by 15% to 40%.
This represents a significant challenge for energy efficiency energy costs for owners. So as we help raise the overall indoor air quality of spaces is critical that we find additional ways to mitigate the economic impact to our customers through the implementation of more efficient systems controls and broad based energy conservation.
Measures, we can take on their behalf, which was critical to offsetting the unintended consequences, increasing overall carbon emissions drayage facing systems energy demand.
That training technologies, we want to be part of creating a better new normal.
We will challenge the status quo to create a new normal where communities thrive where quality this foundational or environment is protected for future generations.
We're putting a stake in the ground that train technologies will lead by example by setting a stork and ambitious commitments and taking action to change our company our industry and the world.
Gigabit unchallenged committed to reducing our customers carbon emissions by one gigabit Con 4 billion metric tons by the year 2030.
To give you an idea of size and scale, that's equivalent to about 2% of the world's annual emissions.
Just our company alone because other companies join US we can bend the curve on global warming.
We're also committed to creating opportunity for all with a goal to achieve gender parity and leadership by 2030 and racial and ethnic diversity that is reflective of our communities.
Our transformation plan for train technologies, because another example of how we're creating a new better normal for our team customers and shareholders executing against the new blueprint that culminated in may after approximately one year of analysis and planning.
Setting needs another bold plans an action our talented team around the world has exhibited all the commitment and passion for change, but as Mark there last decade.
Our goal is simple.
To create a new normal for opportunities accessible for all were healthy food water and medicines or move to people who need them.
Remissions turned down and blue skies trend up.
Our business sits right at the intersection of making those things happen.
With our unique positioning as a focus climate innovator transformed and fit for purpose. We can tackle these pressing and complex challenges and drive differentiated returns for shareholders.
Moving to slide four as.
As everyone listening to this call today can attest.
The global COVID-19 pandemic continues to present ongoing challenges to virtually every aspect of our daily lives.
As much progress as we've made the questions were all contemplating months ago regarding the depth and duration of the downturn and the speed and shape of the recovery I still very much with us.
While there are several promising vaccines and process timing availability the mass distribution capabilities that might radically change the trajectory of the pandemic remain open questions.
Despite these ongoing challenges our team has remained focused and agile effectively navigating and evolving landscape to meet the needs of our customers in order to deliver strong financial results for our shareholders in the third quarter.
We outperformed our end markets broadly delivering strong bookings growth.
Positive revenue growth robust margin expansion strong EPS growth and exceptional free cash flow.
Continued strong performance gives us confidence to once again raise our outlook for 2020 revenues and leverage along with that for raising our outlook for operating income and EBITDA as well.
But we do expect our current outlook for 2020 revenues of down roughly 6% to significantly outperform our prior outlook of downtime percent, 15% well.
We also expect to see some improvement in the fourth quarter as well assuming.
Assuming the current course and speed of the global economic recovery, we now expect the fourth quarter revenues to be down just 5% despite tough comps for our North American Hvdc business and continued weakness in global transport markets.
Additionally, we have improved our outlook for deleverage in quarter, four and 2020 to better than gross margin levels based on expectations for continued strong execution.
Our prior outlook was for gross margin deleverage the low 30% range for 2020.
We continued to take aggressive actions to emerge stronger at the thrive as business conditions improve and new opportunities develop.
We maintained high levels of business reinvestment in innovation and growth programs throughout the third quarter.
Spec to further accelerate our investments in the fourth quarter.
Have a strong slate high ROI projects in our core business as well as opportunities to accelerate investments in new high acute in cold chain storage solutions.
We set a course to accelerate a stranded costs other fixed cost reduction initiatives in the first half of the year.
Order to deliver more bottom line savings in both 2020 and 2021, we are on track to deliver these savings.
We remain in a very strong financial balance sheet and liquidity position, we've delivered strong free cash flow in 2020.
You'll recall, we paused elements, our balanced capital allocation strategy through the third quarter in favor of capital preservation and Optionality.
Exiting the third quarter based on strong performance and a current course speed of the global economic recovery well positioned to bring all elements of our balanced capital allocation strategy back into play at this time.
Our core strategy remains unchanged.
Secular megatrends of energy efficiency, and sustainability are becoming more pricing everyday and.
And these trends are now elevated with increasing need to ensure the health and safety of the environments, we work and live on.
We excel at addressing these mega trends and challenging what is possible for a sustainable world redefining a higher standard for what the world considers normal.
This passion powers us forward to deliver top tier financial performance and differentiated returns for our shareholders.
Now I'd like to turn the call over to Dave to discuss our bookings and revenue performance in the quarter Dave.
Thanks, Mike Please go to slide five third.
Third quarter impacts of the global pandemic drove further contraction from 2019 levels and the majority of our key end markets.
Despite these headwinds our global teams remain focused and agile and delivered positive revenue and 7% bookings growth in the quarter.
In the Americas, the economy is slowly progressing forward, but the situation remains tenuous.
Our Americas segment delivered growth in both bookings and revenue in the third quarter up 8% in bookings and 2% in revenues.
In the Americas, our commercial aviation business has remained resilient through 2020 with Q3 bookings down low single digits in revenue remaining flat with prior year served.
Services continue to outperform equipment, what remained challenged by pandemic specific downturn impacts primarily related to low building occupancy rates and other building closures related to ongoing health and safety concerns our teams have been effective and efficient and adapting to the changing landscape and capturing opportunities to outgrow market conditions in error.
As such as indoor air quality assessments and services.
Strong performance in our residential HPC business enabled us to take advantage of strong growth in both replacement and new construction markets in the third quarter resi.
Residential bookings were up more than 40% and revenues were up high teens in the quarter.
Backlog remains at record levels entering Q4.
Our transport refrigeration business outperformed the overall markets, which were down more than 30% in the quarter.
Revenues were down over 20% bookings were positive in the quarter up low single digits.
Turning to EMEA. The overall EMEA market continues to be challenged the team to continue to execute well EMEA delivered positive bookings growth of 6% in the quarter with growth in both commercial HPC and transport refrigeration.
Revenues again outgrew underlying market conditions down 6% overall.
Commercial actually a seat bookings were up high single digits, while revenues were down mid single digits services outperformed equipment, but are still constrained by pandemic specific downturn impacts noted earlier.
Let me a transport bookings were positive in the quarter up low single digits revenues were down high single digits outperforming the broader transport markets, which were down more than 20%.
Asia Pacific results continued to be mixed with overall bookings down 5% and revenue is down 2%.
China continues to show signs of relatively steady improvement having made the most progress against the pandemic.
Growth in China was more than offset by declines in the rest of Asia.
Where a number of countries have yet to turn the tide on the pandemic and begin on the path of recovery.
Now I'd like to turn the call over to Chris to discuss the results of our quarter in more detail.
Thanks, Dave Please turn to slide six days.
Same provided a good overview of our revenues on the prior slide so I'll focus my comments on margins.
Adjusted EBITDA margins were strong up 80 basis points with operating leverage better than gross margin rates.
We delivered strong margin expansion through focused execution of our recession playbook to adapt to evolving market conditions.
Productivity was very strong across the board in the quarter, reflecting strong execution and cost containment right sized for the revenue declines we expected to see.
Topline execution exceeded our expectations heading into the quarter, which benefited margins given tight cost controls in each segment.
Price costs remain positive in the quarter, while mix remained a significant headwind given steep declines in transfer revenues in both the Americas and EMEA.
We also maintained high levels of business reinvestment and employee safety measures innovation and technology.
Please turn to slide seven.
Turning to the regional segments are once again focus my comments on margins as they provided a good overview of revenues earlier.
In the Americas region strong residential revenues productivity cost containment and price more than offset headwinds from transport mix driving solid margin expansion.
Similarly, the EMEA and Asia Pacific regions delivered strong productivity and cost containment to improve margins versus 2018.
Please turn to slide eight.
We've consistently been able to raise our outlook for revenues and leverage from our initial scenario view at the outset of the pandemic and we are raising it once again heading into the fourth quarter of 2020.
Assuming current course and speed of the global economic recovery. We now expect 2020 revenues to come in down approximately 6% with better than gross margin deleverage.
This compares favorably to our prior outlook for 2020 revenues to be down 10% to 15%.
We expect Q4 revenues to be down approximately 5% with better than gross margin de leverage.
We continue to operate from a position of strength and intend to continue to play aggressive offense through the downturn in order to emerge even stronger company post pandemic.
In terms of our outlook for Q4, we wanted to provide some additional items that may help with your modeling.
We operate a capex light business model of 1% to 2% of revenues and we are likely investing on the lower end of that range for 2020, we expect free cash flow to remain strong and equal to or greater than 125% of adjusted net earnings for 2020.
Quarterly interest expense is expected to be consistent at $62 million in the fourth quarter.
Our tax rate remains in the 19% to 20% range for 2020.
And lastly, our share count is expected to be approximately 243 million shares for 2020.
Now I'd like to turn the call back over to Dave to provide our market outlook Dave.
Yes.
Thanks, Chris Please turn to slide number nine as.
As we've highlighted North America commercial Hvdc has significantly outperformed the broader markets through the third quarter through strong focus agility and execution.
We're seeing high levels of interest in and strong conversion for comprehensive indoor air quality assessments and momentum in this space continues to build.
The universe of opportunity is huge based on billions of installed square footage that could ultimately be evaluated and addressed but the opportunity is still early stages.
For Q4, we expect our North America commercial HIV, a seed business to be down between five and 10%.
Primarily driven by the extremely tough comps the business faces.
Q4, 2019 revenues were up nearly 20%, which is essentially equivalent to two years of 10% growth all in one year.
Tough comps aside our North America commercial HFC business remains healthy and resilient and we expect backlog to be roughly flat in 2020 versus the end of 2019, despite significant declines in the nonresidential markets in 2020.
Turning to residential we saw record bookings and revenue in third quarter, which puts us in a strong backlog position entering the fourth quarter.
Residential still a book and turn business and it's unclear how November or December will shake out at this point so too early to call Q4 at this stage.
Turning to North America transport, we're seeing some positive trends in freight rates and order rates and we're aligned with act that the overall transport market growth rates are likely to improve sequentially from Q3 to Q4.
Act is calling for the market to be down roughly 20% in Q4. So we're expecting continued headwinds for our North America transport business in the quarter.
Turning to EMEA for recovery continues to be relatively soft and country dependent some countries are bracing for another round of restaurant and other venue locked down and border closures. It's too early to call. The recovery broadly in Europe, and we do expect both commercial HBC and transport markets to be challenging in Q4.
Transport markets will be especially challenging as the market outlook calls for 25% decline in the fourth quarter, which will only be amplified by border and venue closures should they occur in parts of Europe.
Turning to Asia, we continue to be encouraged by the recovery in China, which we expect to have solid growth in Q4.
However, we expect to see similar results to the third quarter in the rest of Asia in which revenue declines more than offset growth in China.
Please turn to slide number 10.
At the time, we announced the industrial RMT transaction, we quickly mobilize the transformation office to focused on streamlining our organization to remove $100 million of stranded costs from the business by 2021.
As Mike discussed earlier, we are on track to achieve $100 million in 2020 and $140 million in 2021.
As we've discussed we expect onetime expenses of approximately $100 million to $150 million to eliminate the stranded and other fixed costs.
We have spent approximately $91 million year to date with $15 million in Q3.
Now I would like to turn the call back over to Chris to discuss our balanced capital allocation strategy Chris.
Thanks, Dave Please go to slide number 11.
As Mike mentioned earlier, we paused on elements of our balanced capital allocation strategy through the third quarter in favor of capital preservation and Optionality.
Exiting the third quarter based on our strong free cash flow generation and our current outlook. We are in a strong position to bring all elements of our balanced capital allocation strategy back into play.
Our balanced capital allocation strategy is focused on consistently deploying excess cash to the opportunities with the highest returns for shareholders.
Despite economic conditions, we continue to strengthen our core business with healthy levels of business investments and high ROI technology innovation and operational excellence projects.
Which are vital to our continued growth product leadership and margin expansion.
We remain committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve.
We have a longstanding commitment to reliable strong and growing dividend that increases at or above the rate of earnings growth over time.
We continue to pursue strategic M&A that further improves the long term shareholder returns and we continue to see value in share repurchases as the stock trades below our calculated intrinsic value.
All in we expect to consistently deploy 100% of excess cash over time.
Now I'd like to turn the call back over to David Mike to cover key investor topics of interest and to close at the summary of key points.
Thanks, Chris Please go to slide number 13.
Indoor air quality is generating tremendous interest in the market and our pipeline for services and system enhancements is growing daily.
Fundamentally our customers are turning to us for our unmatched expertise direct service channel and remote monitoring services to improve the safety of their buildings and build the confidence of Theyre building occupancy.
We offer a holistic layered fully customizable approach, which balances key contributors to indoor air quality with energy intensity.
At this stage, we're seeing solid activity for more modest sized projects aimed at immediately addressing the most pressing challenges for reopening buildings.
As Mike highlighted at the outset, we believe indoor air quality represents a long term secular tailwind for train technologies as businesses and consumers alike have come to think differently about the health and safety of the air They breed everywhere.
With an eye on the longer term, we launched our center for healthy and efficient spaces during the quarter.
The center is focused on driving long term strategy and innovation within our business and influencing the establishment of codes and adoption of standards in the built environment.
Please go to slide number 14.
Another topic, we know is on the minds of investors revolves around transport markets in 2020 and 2021.
For 2020, the North American market is expected to be down about 35% and our numbers clearly show outperforming the markets.
The same applies for EMEA, where the markets are expected to be down roughly 25% for 2020.
Well on pace to outperform in EMEA as well.
Turning to 2021, we are positive on the markets and consistent with the market outlooks from act and Hs, which calls for transport markets to be up approximately 31% in North America and 11% in EMEA.
Now I would like to turn the call back over to Mike for closing remarks, Mike.
Please go to slide 15.
We've mentioned that we intend to hold an investor event in December and we firmed up what that event will be well.
We're looking at the morning of December 14th we hope all of you can join us it should be a great event.
While the pandemic continues to present unprecedented challenges to visibility as to how the markets evolve over the near to medium term rather they conduct a traditional investor day with three year topline and bottom line targets. We believe will be more can concrete and constructive to talk about the things we control, which are the transformational activities associated with the new.
Train technologies that we're working on for the past year.
We're going to take a couple of hours in the morning, the 14th to focus on the self help story is train technology supports continued margin expansion and growth across our business that is not dependent and our current end markets perform.
Weve touched on some of these we've been working on this will be a deeper dive in order to provide investors. The continued confidence in our margin expansion and innovation story.
This will be a virtual event given the current environment will follow up with additional details on the event. Please be sure to save the date.
Please go to slide 16.
I believe it was Peter Drucker, who said that culture eats strategy for breakfast and we couldn't agree more with that idea.
The topic of what happens or changes within organizations culture has been top of mind for many of these days and certainly from an.
As we went through the very difficult work of the industrial separation and formation of the reverse Morris Trust re blueprinting, the new train technologies and worked through and whether the impact of the pandemic to this point, we've had plenty on our plate as a newly created train technologies.
I'm proud to say that through all of this the pride energy and optimism that is emblematic of our culture has only gotten stronger.
We recently received feedback from 90% of our associates globally nearly 35000 people in this year's engagement survey with over 60000 verbatim comments provided.
Results for overwhelming our engagement index achieve top quartile again of all companies and improved year over year.
With pride in our company energy for what we do in the World and optimism about training technologies future at the core of the feedback received.
I'm proud of our people our entire team in our shared illustration that one company can change in industry and our industry can change the world.
As I said at the outset of the call energy efficiency and sustainability Mega trends are only growing stronger as time passes and fundamentally we excel with these global Mega trends and sustainability intersect with our innovation capabilities, which drives high demand for our products and services.
The increased focus on the health and safety of spaces, and our holistic approach to helping our customers navigate solutions to improve under our quality as another opportunity for train technologies to make a difference in the world.
We've been investing heavily for years to build franchise brands and to advance our leadership market positions to enable consistent profitable growth and we intend to press our advantage during this downturn to leverage our strong financial and competitive positioning and to invest heavily in the future of trained technologies.
Our message to our investors is another us we're stepping up to the challenge as of today and Tomorrow, and we will never stand still and we're certainly not going to slowdown.
Our results in the marketplace or the ultimate barometer.
So we're not only focused on relentless investments in innovation and growth, but investments and blueprinting and transforming into a leaner fit for purpose pure play company to the elimination of our stranded costs and the execution transformation initiatives that will fundamentally improve the margin profile of the company over the long term.
Lastly.
We remain committed to dynamic and balanced deployment of capital we have a strong track record of both delivering strong free cash flow deploying excess cash to deliver top tier shareholder returns over the years.
With that Chris, Dave and I will be happy to take your questions operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone queue.
Got your question press, the pound or hash key please remember to limit yourselves to one question and one follow up please.
Please stand by while we compile documenting profit sharing.
Your first question comes from Julian Mitchell with Barclays. Your line is now open.
Hi, good morning.
Good morning.
Maybe just the first question around the commercial eight track environments in the Americas, because I suppose as you point out the end market indicates is things like project starts down a week.
Backlog that you think is stable into year end.
So when I think about that would you think that the.
The negative impact of those end market indicators in starts you already moving past the worst of that or do you think that will hit yield backlog.
Needs next year.
Alternatively, there's just no real trend to call out because of Covidien, just taking kind of each quarter as it comes and the market is just too choppy to coolness a trend line.
Yeah, Julien, it's probably a little bit too early on to understand the trend line there but.
Remember that the probably 15% to 20% of our business has really affected by Dodge data that put in place data that you read.
And a lot more that is predicated on how we're doing with creating demand around retrofits and indoor air quality.
So I do think you're correct I do think we exit the year relatively flat in terms of backlog and based on everything that we've been through this past year.
Somewhat of an achievement to end with the flat backlog so.
I think with the current course and speed going into 21.
We've got enough strength and upheld and many of our markets to loan you know to have a decent year in 21 rent growth.
Thanks, and then maybe just a quick.
A follow up question.
Around the residential market.
Any perspectives on what the total market you think is doing this year.
And the extent to which you think that that's a high yield or normal in those.
And the next year and any updates on more thoughts on that replacement cycle.
Yes Ramsey.
Well, it's strange year, because demand was really.
Showed around pushed around.
Thank everyone went into a recession playbook and pandemic playbook is a bit different people generally felt feel good about their jobs and investing in.
Indoor air quality at home and so you saw a drive towards not only.
Replacing systems bode even mix for us that went up versus down through that so I don't think that that continues indefinitely I think it begins to normalize.
Probably in quarter four is certainly in quarter one.
The unique thing is we're moving in from what was really an extended peak season into really the bill that we would normally do in the fourth quarter and beginning of the first quarter.
For the traditional peak season that we would see a cooling season.
As well next year and 21, so I think the best way to look at that is to look at 2020 as a bit of an anomaly.
And then I think we move into a more normalized 21.
Everything that we're seeing around the set up for 21 would be that we see a little bit of growth and 21.
But again, it's all predicated on the current.
Of course and speed of the economy, and certainly how people feel about employment and overall consumer confidence as we get further into it.
The other 20 and it really 21. It course that business is really a book and turn business and we were booking attorney everything you could build than the fourth quarter. Our teams did an outstanding job about.
Being able to meet that demand that we didn't forecast and could that turn into revenue and nice margin expansion for the quarter.
So I want to complement the execution, there, but again I think it normalizes.
Very helpful. Thank you.
Yes.
Your next question comes from Jeff Sprague with vertical research your line is open.
Thank you well over 1 billion halfway done.
Doing great. Thanks.
Just.
On the commercial question the growth that you're seeing in services I think you said low single digits in the quarter.
Is it your view that the kind of pretty steady run rate for the situation that we're in there with some catch up from site access in in.
In Q2.
Yes, Jeff This is Dave I'll start my first comment on but yes, we're very happy with our service business is really globally, they've outperformed equipment, despite the pandemic and.
There is there is a lot of office buildings that are still fairly occupied there is a lot of buildings that are not occupied at all with closures we have schools that.
There is some degrees of.
When students are actually coming back so despite all of that our our service business is still growing and its outperforming our equipment business.
Building availability that still a headwind to certainly a tailwind the net medidata because of positive set up for the service business and I was sort of service business was a great.
Antidote to a recession of course pandemic is different in that if access to buildings was denied it's tough to grow service business, but we're very busy on the Q front and as buildings continue to open.
They'll actually be some deferred service deferred maintenance that I would expect we'd see there as well.
And then I'm wondering on the Q. Thanks.
Thanks.
Additional framing of may be that the square footage could be a target.
It sounds like it's still early days as you know, but I think Dave you mentioned you are starting to book some mid sized projects.
Is there anything we can kinda glean there like what that means from a mid sized project would increase your service opportunity in building X Y Z by some percentage or is this some kind of rough framework to kind of get our head around the dollar opportunity here.
I mean, I would tell you that we continue to see strong customer demand and momentum in indoor air quality number one and just take a step back when we do an assessment Jeff.
It's not a check the box on these assessments take hundreds of hours to complete and we take a very holistic approach when we look at the building. So we it's not just changing out one item within a system that really has to be a systems approach overall as you can make some very bad decisions for the end customer.
Our audits fall Bash race best practices, we ensure the building equipment is operating.
The way it was designed we then start looking at.
Opportunities to improve the indoor air quality, whether that be on the filtration side, whether that be on the fresher exchange side we.
We also look at sensors to improve humidity levels temperature occupancy that's all part of what we would do for our customers. What we do is we lay out for our customers are very layered approach. So we'll tell the customer what we will do on day, one right to get the building operating the best we can with the current assets in place and then we will.
Give them a roadmap for the future and that roadmap could be if they wanted to increase the fresher exchanges to a greater degree they may need additional cooling capacity that could be as Mike alluded to earlier on the energy side, where there's energy projects that can actually reduced the tax that we put on the table.
We need to bring the indoor air quality up when we say modest project, we're talking about what we call day, one projects and that is lets get your building is healthy as we began it with your current set of assets today and then we'll give you that roadmap for the future.
That's why I think it's a long term play because I wanted to do something right now and then ultimately.
Ultimately if the building wasn't designed to do what it needs to do or you are at the system limitations with what those standards should be for the building. They have changed use over some period of time and never was adapted of those those are all.
The necessary investments that need to be made one of the things I just offer this because of the people on the phone or just some advice on this the opposite of a holistic approach as sort of a point solution and one of the points solutions that we're seeing that's a little bit problematic as lot of people have gotten just move to really does filter medium and what what's happening there.
Gross you're not getting.
Often enough air flow out of spaces and as you do that you actually make the situation worse at the ends of duck loans in buildings and so do not getting your changes per hour and in fact, the systems and in fans may not have the capacity to support that.
We're going back in at that point and.
Putting some math modeling around what's the maximum filter media you could change how do we impact that by maybe.
Maybe maximizing actual earned changes how do we get humidity for an aerosol contaminants. So it's a little bit heavier falls faster.
What can we use the kill it that would be great.
Environmental problems for occupants and those are all of the things Holistically, we try to put together as well as the back and energy conservation measures to mitigate the effect of all this.
Great. Thanks for that color that book.
Your next question comes from Josh talk link Keith with Morgan Stanley. Your line is open.
Hey, good morning.
Josh.
Mike with with some of these upgrades that are coming through especially the holistic stuff around by Q.
Appreciate Canada, the global square footage numbers that you threw out there and certainly the size and energy efficiency opportunity on the installed base is pretty large I think in the past you've talked about.
Any applied world kind of that dollar of equipment and $5 of parts and services through the life span any way to dimensionalize.
What these upgrades are worse in the context of that dollar as it is a 10 cents is 90 cents like just maybe give us a sense for how much these things cost.
Relative to just pull.
Oh op purchasing any system.
Yes for it for a dollar spent in an applied systems with a 30 year lifecycle, we'd see a range of eight to 12 times that.
In terms of the service and retrofit potential around that so that's probably what you're referring to there Josh and I think that's true I think the urgency probably.
On the front end to do something in terms of the dig explain plan and that plan has to be consistent with someone's overall financial capacity to execute the plan.
We've got to work customers to be able to do that so days a two day in one or the mitigating things we can do it.
Day, two and beyond what are the things that we need to have to happen in these systems to really put them at.
Standard or a best in class.
Also to as people look at building, particularly tenants and landlords trying to lease buildings, there's going to be some tendency to.
Be inquiring about the stuff from understanding to what degree have you made modifications or what visibility need to do to perform at a bit of at a standard that that should be.
Best unhealthy for occupancy so thats going to play into this as well. So I think we'll be busy doing some asset planning for for customers and longer term I think that probably accelerate some of the retrofits that will also have the impact of things that are in design.
And things that are not yet in designs that will be built in the future probably built to a higher standard not just the installed modeled standard, but the maintenance standards as well.
Because it is really critical as you know that energy can dropped. His example from model to actual can drop 30% in a matter of just a couple of years.
Through customers overriding system.
Points this.
This is analogous to that right you can do all this great work around filters and outdoor air exchanges and dampers linkages, but you're not maintaining that stuff.
Fall back to where you were so maintenance will be improved going forward I think as well as the ability to monitor the stuff remotely because there's just so much out there look at you're going to have to this digitally and look for.
Nominally from the systems.
Got it. It's helpful. Then just pivoting quickly over to the.
The transport side of the house will sense for what the opportunity could look like or any any inquiries customers making about.
Vaccine distribution and transportation, there and the capacity that might be needed to support that.
Yes. This is Dave I'll take that and just takes effect thermo King business. We have a complete line of products and services that is for the whole cold chain for distribution, whether that's air truck trailer Marine rail last mile refrigerated containers.
There are several vaccines I'm sure everyone's aware that are being worked on.
Some are in phase three trials right now, it's unclear as to which will be first to market.
And depending on the vaccine they have different temperature requirements for distribution. So it ranges from a deep freeze, which could be as cold as minus 80 C to frozen, which reminds tendency to just like a pharmaceutical which we like to see.
The markets have sufficient capacity for trailer over the land.
Where we see opportunities is really in three spaces one is in air.
And we've been in the air business for four decades, we have all the re approved certifications, whether its everyday or EASA, which is the equivalent in Europe. We.
We also see some opportunities in last mile and we see a big opportunity in deep freeze cold storage and we just have a new product that we introduced there.
In a few months ago. This is a product that.
In a typical hospital you are deep freeze capability is really about the size of your refrigerator at home.
And our solution. There is about 60 times the volume that deep freeze you'd find in a hospital can hold so that's going to be a big opportunity for thermo King who we're talking to are talking to pharma companies distribution companies Threepl government health care providers.
We're talking to everyone and.
We're going to be ready with the.
Distribution solutions storage solution when that time comes and hopefully soon we start distributing vaccines.
The portable solution, that's going to Sixteenx capacity of the current market capability is still a mobile unit when you pair that with our rental and logistics capability through our rental businesses. We've got the opportunity movies from hone is or isn't new to really proud of the work the key data to every pharma manufacturing and.
Next season vaccine work was done specifically around the requirements and exactly how that eventually these vaccines can be packed to distributor, but also understanding exactly what their supply chain. Once line will the break points could be in the cold chain Lucas.
Moving to map out the capacities for every pharma company billings revenue distribution model all the way through to see US. We're a Walmart for for example here on the left US about how people will eventually be inoculated. So in doing that it's allowed us to be able to look at constraints with the capacities and make sure that we're selling price.
The people would actually need it as opposed to just.
Selling product into capacities that that may not be required that would be a real mess of that happening we're being very conscientious about.
Sort of reserving that capacity to put it into the best plants.
Appreciate it thank might think that.
Your next question comes from Keith Weiss with Jpmorgan. Your line is open.
Good morning.
In 21 of the Port.
We're a long way from the dry ship R. 22 changes if you remember those days, Mike Thats why not do Steve.
[laughter] you don't have to if its didnt did nothing but up into the right. Congrats on continued execution share gain et cetera.
On it.
Just thinking about all this kind of air quality, Stephanie opportunity I mean, what needs to come together.
Amir perspective, as a catalyst to kind of unlock some of this I mean I think.
ASHRAE is very busy trying to kind of figure out standards and you've got obviously that is the messaging around the election around.
Green, new deals and EPS G. I mean.
How how fragmented.
It is it the right now it sounds very fragmented what kind of brings it all together and kind of catalyzes customers do you think to get kind of off the sidelines.
Yes, I think it just comes down to first looking at the behavioral science behind all this and what we as consumers.
Consumerism building occupancy building owners and kind of think about space going forward and so it's not going to require somebody to kind of converting that into one demand or coder standard. Although I think what will happen is initially, particularly in the developed economies there.
There will be immediate look back to looking at buildings and whether or not they're operating at standards and then what would you do to mitigate that I think it creates a step up where codes don't exist or don't exist to the stringent level of a standard.
Where those become.
You know.
Implemented much more quickly than perhaps would have happened.
But particularly for us when you think about.
Our non residential opportunity, which is the bulk of our global business were really only in the US business. If you will in the revenue in the us and Canada.
If you think about that.
Sophisticated building owners applied maybe more institutional critical systems, they get it they get it immediately and they know to open a factory a hospital University or research center, they're going to have to be at least at whatever the best standard dose. So I don't think anything actually has to happen of course anything that could happen that way.
The trade create more focus on driving codes and implementing them faster would be additive to that.
So I mean, you you you think even without that that there is enough.
We'll take kind of funding some of these big investments that they would move beyond just something like.
The 10 ciliary at the margin for your business, Yes, if you think about even just again, our non res business being in the tens of billions of square feet that Weve got us an installed base, that's a great starting point.
And.
In situations like this where you can't get to everybody immediately right away and that's why I say African industry response to solving for 1.7 trillion square feet of space.
You're going to go to the people that get it first and I want to do something about it and so yes, we're going to be selective about who we're talking through how long we're talking to them before somebody does something right. It's a it's a function of making sure that you disqualify opportunity as readily should qualify opportunities when you've got that much opportunity in front of you. So we're going to spend our.
Hi, prioritizing with the people that want to act on it quickly and making sure that we're going to wear.
This action will be taken which of course is going to drive outcomes for health and it's going to drive revenues for us.
Great. Thanks for the color Congrats again.
Your next question comes from Scott Davis.
Hi.
The helium clearance.
Hello.
Scott Hello morning, Wendy.
I am.
And a quick question this quarter, but when you think about the revenue side.
Hi, guys have any visibility into how people are financing units you know whether they now once upon a time I know home equity loans were real popular and I never.
Specialty finance companies, and then and now than it was back to credit cards, I'm, just kind of curious to see what.
How people are paying for things now have you seen a change have visibility on that that far down in the channel.
I guess I'd start with you a savings rates quadrupled as I think I think in quarter, two and the first part accorded three we were sitting around 20%.
Versus a four or 5% savings rate people, obviously arent going out and taking vacations and doing the things that we're doing so I think there is actually more capacity.
I also think that home values have increased with people feel that pretty.
Pretty solid footing at least at this point around home values. So I think between savings rate home equity lines that maybe open.
Thats the primary.
That we're seeing there we're not hearing anything.
Specifically about higher take rate around financing.
Okay. Thanks.
That makes sense I figured that was answered but you never know, it's a strange strange time and then.
Yes.
Other question I have for you guys is just visibility on.
Non res in China.
And.
Kind of looking out there I mean, what are your local guys sang as far as.
Project activity and things.
Things and general outlook.
Scott This is Dave I'll take that.
We're pretty happy with the growth rates that we're seeing right now in China, and our business I think a lot of that comes back to the investments that we made four years ago. When we developed the direct sales force there.
If you remember those days, we had we literally went out in trained.
Three 400 engineers.
Have a direct sales force actually go talk to engineers and architects and to help become the basis of design, so with that as a backdrop, where we're seeing strength in China is in data centers and electronics pharma and health care.
And those are areas that.
We have a lot of activity and we have weakness, obviously as well some of those spots would be office and retail.
But overall on.
The team and you heard Chris say and beginning our team and in China has done just an excellent job and we're really proud of their accomplishments.
Okay. Thank you guys. Good luck.
Yes.
Your next question comes from John Ritchie with Goldman Sachs. Your line is open.
Thanks, Good morning, everyone, Let me Jones Morgan.
So my first question guys.
I'm now on just the resiliency of years of your service business and in North America I'd be curious as you're thinking about 2021.
Whether it's how you kind of contract in the business.
How you expect that to look like in 20 line, particularly at a time now obviously were occupancy rates.
Our lot lower in commercial buildings I'm just wondering if there is.
Any headwind to potentially think through you know as we head into next year.
Yes.
It helps to think about this a little bit of a bell curve.
As it relates to people that are out of business or will be out of business and are coming back in business and there's going to be some space. Obviously, some retail space as an example that right.
Restaurants, that's going to be the question you've got people are absolutely coming back.
Vesting warehousing data centers some of other businesses that relate to that but the folks in the middle that are going to come back it's a matter of.
Sort of time, and maybe density for how they APAC unorganized.
Occupants in buildings Theyre.
They are going to use the opportunity preopening to mitigate as much as we can right I mean, they have to mitigate the space in some way before people return to the office and so we're sitting in North Carolina today, and we're communicating to our population is as recently as last week.
About our intentions and we don't see people coming back into the office here unless they need to do the work or they can and we've put these protocols in place, but we're not expecting people to come back in at least until the early part of next year and even that's up for grabs as it relates to what the science will tell us and case rate.
Look like in the local community, but having said that we've gone through and ticketing taken enormous.
Investment to get our space up.
Beyond the standard you know to have people feel comfortable coming back and I think that you're saying the bulk of the bell curve been.
Companies and landlords and tenants that are requiring some mitigation that take place now and so.
Again between not being able to get to some spaces and then the fill in around providing some mitigating activity for people who are going to be opening as well as providing services for the people that are open there's enough for us to do there and I think see some growth and services.
Hi, Thanks, that's helpful. Mike and maybe just my one follow on question focusing on us by the back for just a second.
It clearly to the the bookings growth has been really good you guys seem seemingly are taking some share there.
Yes, I guess my question is as we kind of switch into that that the cooler months that furnace season.
Are there any.
I guess, given the supply constraints in delivering on the type of bookings growth that you're experiencing and then are there any issues to maybe think through as you kind of switch over into furnace season.
Yeah I'll take that this is Dave we're not seeing any constraints and our supply I think if you go back to the.
No end of March we reconfigured all of our factories and put the right safety protocols in place.
So how the team is working with our suppliers to ensure that they were able to provide this components that still is all in place and right now we have no constraints in front of us.
I just would add that just absolutely heroic efforts by.
Our residential team or manufacturing.
Supply chain teams to make sure that we were able to respond to this demand.
Because again this was not predicted we didn't see these volumes coming.
In a typical recession playbook and this is a different set of human behavior is happening here around people think about in their space at home.
And the ability to respond to that was really a lot of hard work by some great people out in the organization getting it done.
It's good to hear thank you.
Yes.
Your next question comes from Andy Kaplowitz with Citigroup. Your line is open.
Good morning, guys nice quarter.
Thank you morning, Ian.
He keeps me increased demand that you talked about Frank Keeley service on the commercial side to grow the strength to continue to see in residential while I know you talked about expecting more normalized in 21 residential.
Inventories generally across the respected channels still relatively low and does that give you more confidence in the relative end markets as you go into Q4 and into 2021.
The inventories levels coming out of Q2, we were about half of what they need is and has been on right. So do you think about three months is more typical.
But sitting at six weeks and that drove incredible demand that we saw in the June July and August really continued.
I would say as an industry, it's been a bit hand to mouth, if you've got it you probably could sell it and.
That certainly was the case for it for us and really again seer.
Wasnt important people are taking what they can get and they are opting for higher seer if choices were available.
So.
Really I think it hasn't changed much and again. This is why I think that you you run right and from an elongated drilling season in 2020 right into the normal.
Build that we would have seen a basis, what we think to be 21 demand.
That's that's that's not normal usually there's quite a low reaction between.
August September end call it.
December January.
Thanks for that Mike and then I'm sure we'll get into as you said margin targets in December but when we look at year adjusted margin quarter. Net 16, seven we obviously know that seasonally strong, but given the mix of residential freecell improvement and thermo King that's like an app in 21 can we actually see operating leverage.
Can you give me higher than gross margin 21 is there any reason why your longer term target wouldn't be at or higher and integrity laskey, plus we talked about on the margin goals for 2020.
I wouldn't I wouldn't sub as an expectation Andy I think that we always like to tell people that new phenomena is probably.
Five points short of gross margin, giving us an opportunity to continue to really innovate and invest in the business and make sure that we're seeing.
From you know of.
Of course and from our incremental margins of 25%.
Against margins at 16, 17% Thats.
Thats all good good problem to have and of course want to raise gross margins over time so.
Thats a good thing that happen occasionally you know what happens that we have great productivity in quarter, three and excellent price versus material inflation in quarter, three and you can drive outsized.
Leverage in a particular quarter, but in the long run it's best for investors to think about it the way that we're thinking about it which is something close to gross margins, leaving room for investment and some breakage around ideas that don't Pan out.
And thus the lab.
Turning to shape up 21, and beyond we're not creating a lot of headwinds going into 21.
All of the hourly increases that we would have given you in terms of salary increases hourly associates happen no big one was one of.
Normal schedule and then with the delays in salaries increases that we we pushed out into 2001, we brought back into 20.
The sooner and so what you're seeing here is investment back in the salary increases and so the only sort of headwind probably or tailwind is how much really travel and entertainment we would be doing in 21 as an example, and I think that frankly, we're rethinking a lot of those funds right now as many companies are about how much business travel.
How much entertainment do we need to be doing certainly some will come back, but probably never at the levels are unlikely to get levels that they were strictly.
So we're not sending us a situation in the reverse which is really tough leverage coming into 2001.
So I try to write the metal and say 25 is a good number to think about.
Thanks, Thanks very helpful.
Your next question comes from Andrew Obin with Bank of America Merrill Lynch. Your line is now open.
Thank you good morning, and good morning.
And just the question how has cultivated changed your thinking about consolidation in the HPC industry and do you think.
There is sort of.
We're thinking as to what the set up should be a longer term from a strategic standpoint.
Yes, nothing has changed in my thinking or thought process around that I mean covered really doesn't have an impact on that I mean, obviously, it's going to dislocate hurting.
Earnings in Israel.
Between companies, but doesn't really change long term view toward the it's like that something that could and should should happen.
Broader on the M&A question I think is as we think about some of the things that we're doing around the bolt ons you.
You've got sellers that want to use 29% EBITDA margin of course, we have the buyer need to understand the structural changes going forward and the.
Future value of the.
Cash flows that come from that Conversely, if we're looking at things that we're looking to acquire that can be technologies that are helpful. In a pandemic.
Got seller expectations of breakout EBITDA margins that again, you've got to go back and structure look at those.
For future cash flows, but and then due diligence a little bit tougher because most of that is of course remote now and thats not the best way to do due diligence. So other other than that it doesn't really change the long term view toward M&A or or or transformational M&A.
And then just a follow up question sort of thinking about key verticals and specifically offices and institutional.
One of the conversations like with your customers about their ability to actually.
And sort of the upgrades or even fund.
Normal activity into next year have you have those specific conversation.
We have Andrew this is Dave and obviously it depends on the customer, but that's what we've really developed this whole layered approach in our audits and we work with our customer was really say here's your day, one opportunity to make your building.
Healthy as it could be right now and then we give them options to improve going forward and some of that is I'll give you. A real example, we had a customer the other day that wanted to dramatically improve their fresh share exchanges, right, which which makes sense from an indoor air quality standpoint. Unfortunately.
The way that building was design you'd have to put additional cooling capacity to make that happen.
And what we worked out with that customer losses lets exchange into this levels at this level today.
Let's put appeal in the system for additional cooling capacity will deliver that and before the summer months. In 2021. So you are building is ready Thats. A live example of what we're finding is our customer service.
Thank you.
Your next question comes from John Lewis with Credit Suisse. Your line is open.
Hi, Thank you for squeezing me in here appreciate it and good morning to everyone joining John John.
I guess, just two really quick ones, we took a stab at trying to actually size the indoor air quality Tam for education, we came up with 3 billion on public disclosures that are out there.
We took some liberty scaling that up to a number north of 30 billion for the entire opportunity.
Are we in the right ballpark as as you're looking at it today I. Appreciate you don't want to put out a dollar number on it but does that sound right to you.
So I'd say, the first thing and you're talking about 1.7 trillion square feet of indoor space and 400 billion square feet of nonresidential space. The answer has got to do something in the business right. So I don't I don't think you're off it's just a matter of how does that play out in my notion on us as a holistic layered approach.
Mitigating about offering solutions to improve going forward based on.
Economic capacity of somebody to go to undertake some of these initiatives is probably a very long term tailwind in a different way to think about space going forward. So.
It's probably half the size of the market that would be the question it would be the timing, which in my view, it's going to be embedded in the growth rate for a very long time.
How big is that growth rate, we still don't know we need to get more experience here as we go through this with our customers.
Great and it's a question we get in and you're actually talking to the customer So would love to get your perspective, but.
No once we eventually get a vaccine announcement do you think that actually slows any of this investment down.
I don't because its a vaccine for this virus right. I mean, this is to be vaccine for any virus.
And frankly, the reality around future Pandemics I think is great in the fact that people didn't want to.
Have the surety peace of mind around indoor air quality I don't think it changes I think it helps open the economy.
And I think that that has positive benefit.
I don't think its going to really change how people think about preparation just like generally used to think about hurricanes right hitting Puerto Rico, and the golf and how we've prepared for those things and we prepared for the aftermath those things both from a business continuity perspective, but from a health all three of our people perspective.
A pandemic, which is something that we had planned.
For.
Overall.
Health and wellness, so we really from a business continuity prospective learned a lot about.
The pandemic so as to match our Playbooks are going to change for these pandemics and those playbooks for all customers are going to relate to the health of their space.
A restaurant, that's able to stay open.
Because the permit in all these mitigating factors.
We're transmission rates and cans are lower because we've done that all factor into healthier economy. When in fact, we have the next crisis.
No. It makes a lot of sense appreciate it thank you Jim.
This concludes Mickey any portion of today's call I will now turn the call back over he's actually Michael for closing remarks.
Good morning, Thank you everyone for joining the call today, she and I will be available as always for questions. Today, and then obviously with the coming days and weeks and then please mark your calendars for December 14th for Investor Briefing will do a deeper dive on three technologies transformation.
That will be on the 14th with 40 Hills Topo. Thank you again and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for joining you may now disconnect.
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